Investor behavior in the currency option market during the COVID-19 pandemic

Wael Dammak, Nahla Boutouria, Salah Ben Hamad and Christian de Peretti ()
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Wael Dammak: LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, UCBL - Université Claude Bernard Lyon 1 - Université de Lyon
Salah Ben Hamad: Université de Sfax - University of Sfax
Christian de Peretti: ECL - École Centrale de Lyon - Université de Lyon, LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon

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Abstract: This study investigates the COVID-19 pandemic's impact on investor behavior in the currency options market, emphasizing its relationship with underlying exchange rates. Using a sample of daily data from select futures continuous calls from September 22, 2016, to December 31, 2021, we introduce a novel variable, "market imperfections," to quantify the gap between observed and theoretical currency option prices based on the Garman and Kohlhagen model. Through the application of a Markov switching model, we identify pandemic-related changes in investor behavior, characterized by patterns of divergence and convergence. Our research distinguishes between two key behavioral types in the market: fundamentalists and chartists. This study enriches the literature by clarifying how crises, specifically the COVID-19 period, influence investor dynamics and affect market responses. Overall, we provide critical insights into the factors shaping behavior during challenging periods.

Date: 2023-11
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Published in The Journal of Economic Asymmetries, 2023, 28, pp.e00337. ⟨10.1016/j.jeca.2023.e00337⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04875460

DOI: 10.1016/j.jeca.2023.e00337

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